Financial Services Law

A bill now before California’s legislature would require servicers suspend borrowers’ payment obligations on home loans for a year and for six months or more on car contracts or loans. The bill would also ban foreclosure, eviction and repossession until six months after the date of the state declares an end of the COVID-19 emergency. [1]

Assembly Bill 2501 was passed by the Assembly Banking and Finance Committee at its first hearing on May 19, 2020. The bill would add a new Title 19 to California Civil Code, titled the COVID-19 Homeowner, Tenant, and Consumer Relief Law of 2020 (commencing with § 3273.01). Currently, the bill contains the provisions described below, [2] but its author, committee chairwoman Monique Limón, emphasized at the hearing that the bill is still very much a work in progress and she intends to work with all “stakeholders” to improve it.

Temporary Ban On Foreclosure, Eviction, And Repossession

Until 180 days after the state declares that the emergency related to the COVID-19 disease has ended, no servicer may (a) begin or continue a judicial foreclosure action, (b) record a notice of default, (c) evict a person following a foreclosure, or (d) repossess or give notice of intent to repossess a mobile home or motor vehicle. (§§ 3273.10(a), 3273.30.)

During the same period, a servicer must stay all proceedings and time limits on previously commenced judicial and non-judicial foreclosures. Also, during that period, all time limits for a borrower to respond, cure a default, redeem, or take any action are stayed, unless the property is vacant or abandoned. (§ 3273.10(b), (c).)

Required Forbearance

A servicer must grant the borrower forbearance from all obligations under a home loan or a car contract upon the borrower’s oral or written request and statement that he or she is experiencing hardship during the COVID-19 emergency. No documentation of hardship is required. (§§ 3273.11(a), 3273.31(a).)

A servicer must also automatically grant forbearance to any home loan borrower who becomes 60 or more days delinquent. (§ 3273.12(a).)

On a home loan, the initial required forbearance period is 180 days. (§§ 3273.11(b), 3273.13(a).) The forbearance period must be extended for another 180 days if the borrower requests an extension within 30 days before the end of the initial forbearance period. (§ 3273.11(b), 3273.13(a).)

On a car contract, the initial required forbearance period is 90 days. (§ 3273.31(b).) On the borrower’s request, the forbearance period must be extended throughout the COVID-19 emergency period and for 180 days thereafter. (§ 3273.31(b).)

During the forbearance period, the servicer may not assess, accrue, or apply to a borrower’s account any fees, penalties or additional interest beyond the amounts scheduled or calculated as if the borrower made all required payments on time and in full. (§§ 3273.13(b), 3273.31(c).) Thus, the servicer will receive no interest or compensation for the delay in receiving payments that would have fallen due during the forbearance period.

Required Modification If The Borrower Can Resume Payments

Before the forbearance period ends, the servicer must evaluate the borrower’s ability to resume making payments in the previously required amounts. (§§ 3273.14(a), 3273.32(a).)

If the borrower can make the previously required payments, the servicer must modify the loan or contract to extend its term for the same length of time as the forbearance period, allowing the borrower to make periodic payments as required by the original loan or contract. (§§ 3273.14(b)(1)(A), 3273.32(b)(1).) No penalties, late fees, or additional interest may be accrued beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full. (Ibid.)

The servicer must send the borrower a written notice of the modification, including a new payment schedule, and state that the borrower may prepay the suspended payments at any time. (§§ 3273.14(b)(2), 3273.32(b)(2).) The modification must be given without requiring the borrower to waive any claim. (§ 3273.32(b)(3).)

If a servicer claims that investor guidelines or any applicable law prohibits it from granting the required modification of a home loan, it must notify and provide documentation of that claim to the borrower and the Department of Business Oversight (“DBO”) of that fact at the time the servicer first offers the borrower loan forbearance. (§ 3273.14(b)(1)(C).) The DBO will determine whether the claim is valid, subject to judicial review. (Ibid.)

Requirements If The Borrower Cannot Resume Payments

If a servicer determines that the borrower cannot resume payments on a car contract in the previously required amounts, the servicer may send notice of its intent to repossess, but not before 180 days after the end of the COVID-19 emergency. (§ 3273.32(c).)

If a servicer determines that a borrower cannot resume payments on a home loan in the previously required amounts, the servicer must evaluate the borrower for all loan modification options, without regard to whether the borrower has previously requested, been offered, or provided a loan modification or other loss mitigation option and without any requirement that the borrower come current before that evaluation or as a condition of eligibility for the modification. (§ 3273.1(c)(1).)

If the borrower is eligible for a loan modification, the servicer must implement it without any penalties, late fees, additional interest other than amounts scheduled or calculated as if the borrower or obligor made all contractual payments on time and in full. (§ 3273.14(c)(2).) If the borrower is not eligible of a loan modification, the servicer must evaluate the borrower for all available nonhome retention loss mitigation options before taking any step to foreclose. (§ 3273.1(d).)

Home Loan Escrows

If it holds an escrow account for payment of taxes, insurance or other sums, the servicer must advance its own funds to pay those expenses on or before any relevant deadlines to avoid a penalty. (§ 3273.13(c).) At the borrower’s election, the servicer may recover its advances (1) in a lump sum, (2) amortized over 60 months, or (3) capitalized into the loan. (Ibid.)

If the borrower elects to have escrow advances capitalized into the loan and is able to resume regular payments at the end of the forbearance period, the servicer may modify the borrower’s loan by reamortizing the total unpaid principal balance and extending the term of the loan sufficiently to maintain the regular mortgage payments. (§ 3273.14(b)(1)(B).)

Penalties For Non-Compliance

A servicer cannot obtain a deficiency judgment on a car contract if it violates the Act’s requirements. (§ 3273.33.)

A servicer may not foreclose a home loan if it violates any of the Act’s requirements, unless it cures the violation by giving the borrower a refund, forbearance, or other compensation, so that the borrower is returned to a state similar to that which the borrower would have been if no violation had occurred. (§ 3273.18(a).)

In addition, any violation with respect to a home loan is deemed a violation of Business and Professions Code section 17200 as well as of the law under which the servicer is licensed. (§ 3273.18(b),(c).)

Before a trustee’s deed upon sale is recorded, a home loan borrower may sue to enjoin foreclosure based on a material violation of the Act’s requirements. Any injunction will continue until the court determines that the servicer has corrected and remedied the violation. (§ 3273.19(a).)

After a trustee’s deed upon sale is recorded, a home loan borrower may recover his or her actual damages resulting from any material violation of the Act’s requirements. (§3273.19(b).) If the court finds the violation was intentional, reckless or the result of willful misconduct, it may award the borrower the greater of treble damages or $50,000. (Ibid.)

The court may award attorney fees to a borrower who obtains an injunction or recovers damages. (§ 3273.19(d).)

Effective Date

As currently drafted, AB 2501 is not urgency legislation and so would not become effective until January 1, 2021, if enacted.

Key Problems With The Proposed Legislation

AB 2501 would have severely adverse economic consequences for servicers. Their revenues will drop precipitously if a substantial percentage of their borrowers request forbearance. Servicers’ expenses will not fall, but instead may increase. Under many pooling and service agreements, servicers must continue to pay investors even when not receiving borrower’s payments. Home loan servicers will also be required to pay taxes, insurance premiums, and homeowner association dues on loans for which they hold escrow accounts. Investor guidelines will require the servicers to conduct monthly inspections of properties securing loans in forbearance. Home loan servicers will also incur substantial added costs in evaluating borrowers’ ability to resume payments and their eligibility for loan modifications or other loss mitigation options. Auto finance companies will experience no drop in their cost of funds during the forbearance period but will likely incur added expense in purchasing collateral protection insurance on many of the cars securing car contracts in forbearance.

Losses on repossession or foreclosure after the mandatory forbearance period ends are also likely to be significantly higher. Cars decline in value quickly. They will continue to do so during the mandatory forbearance period, particularly in the hands of impecunious borrowers who may be unable to pay for their proper maintenance or repair. Houses also lose value when not properly maintained or repaired. These problems will likely be exacerbated by sudden glut of repossessed cars and foreclosed properties at the end of the mandatory forbearance period.

As currently drafted, AB 2501 does not require borrowers to compensate servicers for the use of their funds or the collateral during the forbearance period. For that reason, the Act may violate the U.S. Constitution’s ban on state laws impairing the obligation of contracts. Also, the Act may be preempted by federal law as applied to some types of home loans, such as those originated by federal savings institutions, or held by Fannie Mae or Freddie Mac or insured by the FHA or VA. These and other legal challenges are almost certain to be raised if AB 2501 is enacted, but unless a court enjoins the Act’s enforcement during the litigation, servicers will likely be forced to comply rather than risk the Act’s severe penalties for violations.

In its current form, AB 2501 would also risk benefiting a large number of non-needy borrowers, exacerbating the Act’s adverse impact on servicers. A year’s deferral of payments must be given if the borrower asks for forbearance and states he or she is “experiencing hardship during the COVID-19 emergency”–or simply falls 60 days or more delinquent on a home loan. When a year-long “payment holiday” can be had for so little, many who can easily afford to pay will likely take advantage.

Both oral and written forbearance requests will cause practical problems for servicers. Unless the servicer records every telephone call and in-person conversation, it will be unable to prove that the borrower did not make an oral request. Unlike the loan servicer that processes thousands of such requests, the borrower makes only one and so is likely to recall–or possibly fabricate–a conversation in which he or she requested forbearance. Written requests are more difficult, but not impossible, to fabricate. However, AB 2501 does not require that either type of request be made to an office or personnel equipped to handle the request. A request will apparently be effective even if mailed to a branch office that does not service loans. Under AB 2501, a servicer must, during the forbearance period, “evaluate the borrower’s ability to return to making” regular payments under the home loan or car contract. It also requires home loan servicers to evaluate the borrower for all available loan modification, nonhome retention, or other loss mitigation options. But the Act does not give the servicer the tools or information needed to accomplish those tasks. The Act does not require (or authorize the servicer to require) the borrower to submit information regarding his or her current financial or other circumstances. The Act does not explain how a servicer is to evaluate a borrower without that information, nor does it allow the servicer to forego the evaluation if no information is provided.

Evaluating a borrower for a loan modification or other loss mitigation option will be made all the more difficult if there are two or more loans secured by the same property. Unlike the Homeowners’ Bill of Rights Act, much of which applies only to first lien home loans (Civ. Code, §§ 2920.5(d), 2923.6(c)), AB 2501 would require forbearance and modification of junior loans as well. The Act provides no means for senior and junior lenders to share information about their common borrower’s financial circumstances or to coordinate their loan modification offers so as to equitably share the cost of reducing the borrower’s total payments to an affordable level.

Because AB 2501 is not urgency legislation, it may give servicers a strong incentive to foreclose or repossess now, before the Act becomes effective on January 1, 2021.

Act Before The Act Is Enacted

Given AB 2501’s potentially severe consequences, lenders, finance companies, loan servicers and others likely to be impacted by its provisions should act now either individually or through appropriate trade groups to oppose the measure or to work with its author to cure its many problems.

Should you have any questions or seek additional information, please contact Jan T. Chilton at jtc@severson.com or Jarlath M. Curran at jmc@severson.com.

[1] In this summary of the proposed legislation, “servicer” refers to the holder or servicer of a home loan or car contract; “borrower,” to the obligor on a home loan or car contract; and “car contract,” to a loan or installment contract for a mobile home or motor vehicle.
[2] This summary describes only AB 2501’s provisions regarding home loans and car contracts, not its provisions governing multifamily housing, PACE and payday loans.